Solution to Intellectual Property Issues in Company Listing

[Author] Xue Xiaowei[Abstract] The series of review documents and Q&A on the listing of the Science and Technology Innovation Board issued by the China Securities Regulatory Commission and the Shanghai Stock Exchange, as well as the regulations and requirements on intellectual property rights, are scattered among various documents, which at first glance appear to be quite complex. But analyzing these regulations, we can see that the competitive advantages of its main business – core technology – intellectual property, all three need to have a supporting audit logic framework. Qualified Sci Tech Innovation Board enterprises need to have a lasting competitive advantage in their main business, which comes from core technologies and innovation capabilities that can continue to lead. Their core technologies and innovation capabilities that can continue to lead should be demonstrated through intellectual property rights. At the same time, core technologies should have complete intellectual property protection and be free from intellectual property risks such as ownership, infringement, and instability.

[Main text]

The rampant outbreak of the COVID-19 pandemic in 2020 has made the whole world nervous about how the economy will develop, and China’s economy is steadily starting to develop, with Chinese technology companies performing particularly well. NIO’s market value increased from 6.3 billion US dollars to 76.5 billion US dollars in 2020, an increase of 1112%; The market value of Ningde Times is one step away from one trillion yuan, surpassing PetroChina and China Life Insurance, and entering the top ten A-share market value; Regardless of mature technology companies such as BAT. Listed technology companies are increasingly ushering in a spring of wealth.
In response to the needs of the times, the Science and Technology Innovation Board was established in June 2019, positioning itself as a technology innovation enterprise that provides services for breakthroughs in key core technologies and has high market recognition. Key support will be given to high-tech industries and strategic emerging industries such as new generation information technology, high-end equipment, new materials, new energy, energy conservation and environmental protection, and biomedicine. Aiming to solve the problems of large investment, long cycle, high risk, insufficient indirect and short-term financing capabilities, and the need for long-term capital guidance and catalysis in technological innovation, providing a capital market that promotes the integration of technology and capital, accelerates the formation and effective circulation of innovative capital. The Science and Technology Innovation Board implements a registration system. In 2020, a total of 145 companies were listed on the board, with a cumulative financing of 222.622 billion yuan. Technology companies have ushered in a great opportunity and spring to go public.

However, intellectual property, as an important indicator of core technology and innovation for technology-based companies, has become a roadblock for many listed companies. These companies failed to pass the intellectual property review of the China Securities Regulatory Commission and the Shanghai Stock Exchange, with 17 companies terminating their listings due to intellectual property reasons in the first half of 2020. For example, Bola Network, the Science and Technology Innovation Board Listing Committee considered that the disclosure of its business model and business essence, core technology and technology progressiveness, as well as the application of core technology in the main business was insufficient, inaccurate, inconsistent, and did not comply with the provisions of the relevant business rules of the Science and Technology Innovation Board. Finally, the Shanghai Stock Exchange decided to terminate the review of the company’s IPO and listing application on the Science and Technology Innovation Board. Companies that are also affected by core technology reasons in their listing process include Jiangxi Jindalai Company, Guangzhou Folans Co., Ltd., and Zhonglian Yungang Data Technology Co., Ltd. The focus of the above enterprises’ inquiries is focused on intellectual property rights, such as whether the protection scope of relevant patents covers all products and services, whether the company’s core technology is progressiveness, whether the core technology depends on a third party, and whether the core technology has the risk of rapid iteration.
Secondly, during the listing process, it encountered intellectual property lawsuits from competitors, such as the first patent case on the Science and Technology Innovation Board, where Guangfeng Technology was sued by Delta Electronics as soon as it went public. Subsequently, companies such as Anhan Technology, Jingfeng Mingyuan, and Suzhou Minxin have all been embroiled in patent disputes before and after going public. In 2020, the Science and Technology Innovation Board has issued a total of 52 patent litigation notices.

The regulations and requirements for intellectual property rights for listing on the Science and Technology Innovation Board can be roughly divided into three levels: firstly, the “Guidelines for the Evaluation of Science and Technology Innovation Attributes” issued by the China Securities Regulatory Commission and the “Interim Provisions on the Application and Recommendation of Science and Technology Innovation Board Enterprises for Issuance and Listing on the Shanghai Stock Exchange” issued by the Shanghai Stock Exchange, which are relatively basic requirements for intellectual property rights for listing on the Science and Technology Innovation Board; The second is the “Guidelines for Information Disclosure Content and Format of Companies Publicly Issuing Securities No. 41- Prospectus of Sci Tech Innovation Board Companies” issued by the Shanghai Stock Exchange, which is a specific requirement for intellectual property rights listed on the Sci Tech Innovation Board; The third part is the “Shanghai Stock Exchange Science and Technology Innovation Board Stock Issuance and Listing Review Q&A” released by the Shanghai Stock Exchange and its actual listing review. This part is more flexible and flexible for each enterprise’s specific situation, and can also be understood as a specific review of whether the enterprise meets the first two documents. The regulations and requirements for intellectual property rights for listing on the Science and Technology Innovation Board are as follows:
1、 The requirements for intellectual property rights in the “Guidelines for Evaluating the Attributes of Science and Technology Innovation” issued by the China Securities Regulatory Commission and the “Interim Provisions on the Application and Recommendation of Enterprises for Issuance and Listing on the Science and Technology Innovation Board of the Shanghai Stock Exchange” issued by the Shanghai Stock Exchange are to support and encourage enterprises in relevant industry sectors that meet the following three indicators to apply for listing on the Science and Technology Innovation Board: (1); (2) More than 5 invention patents that generate main business revenue; (3) . In the relevant industry sectors that support and encourage the positioning regulations of the Science and Technology Innovation Board, although they have not met the above indicators, enterprises that meet one of the following conditions apply for listing on the Science and Technology Innovation Board:… (5) A total of 50 or more invention patents (including national defense patents) that form core technologies and main business income.
2、 The requirements for intellectual property rights in the “Guidelines for the Content and Format of Information Disclosure by Companies that Offer Securities to the Public No. 41- Prospectus of Companies on the Science and Technology Innovation Board” include:

Article 33: The issuer shall disclose the risks that may arise due to significant changes in technology, products, policies, business models, etc., taking into account the characteristics of science and technology innovation enterprises
（1） Technical risks, including risks such as technological upgrades and iterations, research and development failures, non exclusivity of technology patent licenses or authorizations, and failure of technology to form products or achieve industrialization;
（5） Legal risks, including major technical and product disputes or litigation risks, defects in land and asset ownership, equity disputes, administrative penalties, etc., have an impact on the issuer’s legal compliance and continued operation.

Article 54 The Issuer shall disclose the core technology and technology sources of its main products or services, and disclose the technological progressiveness and specific characteristics of the Issuer in combination with the technological level of the industry and its contribution to the industry. Disclose whether the issuer’s core technology has obtained patents or other technical protection measures, and the application and contribution in its main business, products or services.

Article 62: The issuer shall analyze and disclose its ability to independently and continuously operate directly in the market:
（1） In terms of asset integrity. Production oriented enterprises have the main production systems, auxiliary production systems, and supporting facilities related to production and operation, and legally own the ownership or use rights of the main land, factories, machinery and equipment, as well as trademarks, patents, and non patented technologies related to production and operation;
（7） The issuer does not have any major ownership disputes over its main assets, core technologies, trademarks, significant debt repayment risks, major guarantees, litigation, arbitration or other contingencies, or significant changes in the operating environment that have or will have a significant impact on its ongoing operations.

3、 The “Shanghai Stock Exchange Science and Technology Innovation Board Stock Issuance and Listing Review Q&A” released by the Shanghai Stock Exchange does not directly involve intellectual property issues, but it does not hinder the actual review of intellectual property issues in the listing review, especially for core technology issues, many of which require explanations of intellectual property issues to achieve the purpose of explanation. In the audit of Shenzhen Besta Medical Co., Ltd., the issuance review committee requires the issuer’s representative to explain:
1. Whether the technology source is legal, whether the ownership of the technology is clear, whether there is a potential risk of infringing third-party technology, whether the allocation of research personnel and cost investment are sufficient to support the research and development of related technologies, and whether they are reasonable;
2. There are currently 2 invention patents. Does the acquisition of these invention patents match the issuer’s technological advantages as stated in the application materials, and can they support business development. In the audit of Guangzhou Fangbang Electronics Co., Ltd., the issuance review committee requested the issuer’s representative to explain:
(1) The main disputes, case proceedings, and related product information of the issuer’s competitor Tuozida’s lawsuit against the issuer for infringement of its invention patent, as well as whether there will be any other potential disputes or controversies regarding the related products and patents after winning the second instance of the case;
(2) Does the core technology route of the fundraising project “two-layer flexible copper-clad laminate” infringe on the patents of others, and does Xia Dengfeng’s specific time and method of providing technical support to the issuer coincide with his tenure at Tiannuo Optoelectronics;
3. Whether the founding shareholders, directors, supervisors, and core technical personnel of the issuer have violated the non compete agreement or commitment with the original unit, and whether it will lead to intellectual property disputes or controversies with the issuer;
4. Are there any other disputes or potential legal risks regarding the issuer’s main products and core intellectual property.

In 2020, the Science and Technology Innovation Board has issued a total of 52 patent litigation notices, becoming a high incidence area for patent litigation. Companies such as Anhan Technology, Jingfeng Mingyuan, and Suzhou Minxin have all been embroiled in patent disputes before and after going public. However, the intellectual property litigation obstacles encountered by companies listed on the Science and Technology Innovation Board are actually based on Article 33 of the Shanghai Stock Exchange’s “Guidelines for the Content and Format of Information Disclosure of Companies Publicly Issuing Securities – Prospectus of Science and Technology Innovation Board Companies”, which prohibits significant technical or product disputes or litigation risks, and Article 62, which states that the issuer does not have significant ownership disputes, litigation, or arbitration over core technologies or trademarks. The solution to the intellectual property litigation obstacles encountered in the listing of the Science and Technology Innovation Board is actually a fulfillment of the intellectual property regulations and requirements for listing on the board, and the two are one issue.

The series of documents and Q&A issued by the China Securities Regulatory Commission and the Shanghai Stock Exchange regarding intellectual property regulations and requirements are scattered throughout the documents, which may seem complex at first glance. However, analyzing these convoluted regulations, we can see the competitive advantages of their main business – core technology – intellectual property rights, which require a supporting review logic framework. That is to say, the audit approach of the Development and Review Committee is that eligible Sci Tech Innovation Board companies must have a lasting competitive advantage in their main business, and their competitive advantage in their main business comes from core technologies and innovation capabilities that can continue to lead. The core technologies and innovation capabilities that can continue to lead should be demonstrated through intellectual property rights. At the same time, the core technologies need to have complete intellectual property protection and be free from intellectual property risks such as ownership, infringement, and instability.
So, recognizing this, I believe we have caught the nose of the intellectual property work related to the listing on the Science and Technology Innovation Board. Below, we will explain from three aspects: the need for complete intellectual property protection for core technologies, the ability to continuously lead in core technologies and innovation through intellectual property, and the risks of intellectual property such as lack of ownership, infringement, and instability
The complete intellectual property protection of core technologies is not only about patent applications, but also requires an understanding of the upstream, midstream, and downstream application scenarios of the industry, the positioning and position of the enterprise in its own industry, the intellectual property layout of competitors, and even further consideration of possible future litigation and monetization. The comprehensive intellectual property protection of core technologies should be planned in conjunction with the technology and patent lifecycle, and a comprehensive patent strategy, patent layout, patent portfolio management, etc. should be formulated to truly achieve comprehensive intellectual property protection and realize the value of intellectual property. A team that has not experienced patent monetization, industry infiltration, and the refinement of patent layout for massive product projects cannot achieve outstanding results.
The core technology and innovation capability of an enterprise should be demonstrated through intellectual property such as patents, which is based on the first point of complete intellectual property protection (including the inheritance of intellectual property). Therefore, at the beginning of formulating the protection strategy, it is necessary to take into account that the core technology and innovation capability of the enterprise can be presented through intellectual property. Therefore, firstly, it is necessary to understand industrial technology, understand enterprise operations, and be able to conduct in-depth and multidimensional intellectual property analysis. At the same time, one should be able to correlate intellectual property analysis with industry, product, and technology analysis, and then use intellectual property to demonstrate the core technology and innovation capabilities of the enterprise; Second, patents and industrial big data are needed. Through in-depth comparative analysis of the enterprise, industry and patent big data, and combining with the operation of the industry and company, we can truly demonstrate the progressiveness and innovation ability of the enterprise’s core technology. This requires professionals with rich experience and profound insights in intellectual property, industry and enterprise operation.
Intellectual property risks such as ownership, infringement, and instability involve various aspects of intellectual property rights, including trade secrets, which are more complex and variable. It is best to prevent them in advance. For example, at the beginning of the establishment of a company or before planning to go public, professional intellectual property personnel can be used to establish various professional and scientific enterprise intellectual property systems, such as background checks and regulations, contract intellectual property clause reviews, pre launch patent risk assessments, patent proposal reviews, etc. By carrying out standardized and solid intellectual property work, risks can be resolved in advance. If time is tight and facing listing, on the one hand, risk assessment should be carried out as early as possible to identify the obstacles and attack points of listing, prepare for response simulations in advance, weigh the pros and cons, and formulate multiple solutions to avoid sudden complaints from competitors before listing, and avoid being caught off guard and collapsing; On the other hand, it is to face risks directly. For example, for ownership risks, contract reinforcement can be made through agreements. For infringement risks, patent big data can be used to lock in blockers and risk patents, clarify the scope of infringement, and propose measures including invalid or avoidance designs. If necessary, self owned patents can be inventoried or patents can be purchased to be prepared for counterattack at any time; Finally, it is necessary to consider various ways to transfer and resolve risks, such as utilizing competitive relationships, adjusting business models, and initiating invalidation in advance. The investigation and appropriate handling of intellectual property risks require professional, meticulous, systematic consideration and dynamic adjustment, which is a test of the team’s comprehensive professional competence.
The solution to the above problems can only be briefly explained here, and it is best to have a team that is professional, experienced, and equipped with an intelligent patent big data analysis platform to complete it. Ordinary enterprises can seek help from external professional organizations. However, in order to demonstrate the core technology and innovation capability of enterprises through intellectual property rights, and to have complete intellectual property protection for core technology, the work of identifying and appropriately handling intellectual property risks such as ownership, infringement, and instability has greatly exceeded the scope of capabilities of general patent agencies that are only good at patent applications, as well as the scope of capabilities of general law firms that do not understand technology.